Suppose that households, businesses and organized labour all expect the inﬂation rate to increase and behave accordingly, this will cause:
A) an acceleration of the inﬂation rate.
B) a reduction in the inﬂation rate.
C) the Phillips curve to shift away towards the origin.
D) the level of unemployment to increase.

Question

Quizplus · Accepted Answer

When households, businesses, and organized labor all expect the inflation rate to increase and adjust their behavior accordingly (e.g., by demanding higher wages, increasing prices), it can lead to a self-fulfilling prophecy where the inflation rate indeed accelerates due to these anticipatory actions.

Suppose That Households, Businesses and Organized Labour All Expect the Inﬂation